Where’s the Money?

That is the question that was asked repeatedly by members of congress to the former senior management of the late MF Global. The response was a few feeble shrugs and I don’t knows. CNBC has been running ridiculous contests like “Where is John Corzine?”, and “What does John Corzine want for Christmas?”

The reporting on this by the media has been exaggerated and wildly inaccurate, most likely because he is a democratic billionaire, and therefore a traitor to his class. Enron’s Ken Lay and Jeffrey Skilling received kinder treatment. This is where all of the speculation of an imminent arrest is summing from. Since General Electric (GE) sold CNBC to Comcast, I noticed that the cable network has been making up more of its own news, and this is a classic example.

I know John Corzine because he tried to hire me for Goldman Sachs 25 years ago, without success. Billionaires at the end of immensely successful careers don’t break the law and tell lies just to make another billion, especially in a heavily regulated and closely watched business such as the securities industry. Those are the actions of a junior “wanabee” rogue trader. So I’ll give you my take on the situation.

When he says he has no idea where the money is, I’m sure Corzine is telling the truth. If he did, he would be the first CEO in history to be knowledgeable about the firm’s day to day margin position. That is usually the responsibility of a mid-level bean counter who is in constant contact with the exchanges. I also don’t believe that the money was lost in a bad bet in the Eurobond market.

A company like MF Global has thousands of relationships with customers, prime brokers, and banks all over the world. Unfortunately, it fired all the people who maintained these relationships the day after the bankruptcy filing because they knew they couldn’t make the payroll. The people who knew where the money was were all sacked.

To trace the money, the bankruptcy administrators are going to have to use a third party accounting firm to trace the money with a forensic examination that will take months. My understanding is that 40,000 MF customers were divvied up among seven different futures brokers, like RJ Obrien. When cash turns up, it will be returned to the customers.

There was an immediate payout of 60% of customer funds the week of the bankruptcy. Another 12% was paid out this week after $800 million was “found” at another bank. If you have heard nothing about your account so far, you may simply have to check a few boxes on a five page form to recover 72% of your funds.

Even if it turns out that the money was lost in the market, I still think the customers will be made whole. They are at the absolute top of the seniority chain for claims on nearly $70 billion in assets. Many more creditors are going to have to take 100% haircuts before the customers lose a penny, including stock and bond holders and commercial creditors.

If there is a shortfall, I think the CME will want to maintain its pristine record of a customer never losing money from a counterparty failure. So I think they will come up with a payoff of their own, possibly from a new insurance fund capitalized by a transaction tax.

The bottom line is that MF customers will get their money back, and most of it soon. But it could be years before they get their last penny, and they should be prepared to receive a lot of papers in the mail.


I Haven’t Got It

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